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Mizuho upgrades SCANA to 'buy' on potential for nuclear cost securitization

Mizuho Securities USA LLC on Oct. 9 upgraded SCANA Corp. shares to "buy" from "neutral" on the assumption that South Carolina regulators will agree to securitize $2.6 billion in outstanding costs tied to the abandoned V.C. Summer nuclear expansion.

The South Carolina Office of Regulatory Staff, or ORS, has recommended the Public Service Commission of South Carolina adopt securitization for the unrecovered costs over a 20-year period as part of its plans to address the financial fallout from the scrapped reactors.

"Unlike consensus, Mizuho believes that the securitization scenario has the highest likelihood of adoption given that it maximizes benefits for ratepayers," Mizuho analyst Paul Fremont wrote. "We would expect the legislature to be sympathetic to securitization and pass an enabling law during next year's legislative session."

Economic consulting firm Bates White in a July 18 analysis wrote that the securitization of SCANA utility South Carolina Electric & Gas Co.'s nuclear investment could lower the overall cost recovery and "mitigate the rate impact to customers."

ORS commissioned the Washington, D.C., firm to compare the securitization of outstanding nuclear costs to other proposed financing methods for the scrapped reactors.

While Richmond, Va.-headquartered Dominion Energy Inc. has offered to acquire SCANA and help offset V.C. Summer costs, the merger agreement states South Carolina Electric & Gas must be allowed to include $3.3 billion in electric retail rates during a 20-year amortization period.

The Bates White analysis contends securitization could be used to finance these costs, or a portion of these expenses, over the same 20-year period.

"Securitization of $3.3 billion could reduce the total estimated cumulative revenue requirement by as much as $1.5 billion over 20 years based on certain simplifying assumptions," Bates White wrote. These assumptions include the strength of the legislation needed to enact securitization, market conditions at the time of bond issuance, the structure of the bond issuance and regulatory treatment of any costs remaining in rate base, among other factors.

Bates White concluded that securitization could provide "immediate funds" to South Carolina Electric & Gas to pay off debt, manage equity, fund a rate reduction and pay for other outstanding utility needs.

Dominion has warned it will walk away from its deal with SCANA if there are material changes that impact its agreement, such as V.C. Summer cost recovery.

Mizuho said the "securitization scenario would provide an attractive setting for future M&A bidders if the Dominion merger proposal is terminated."